Real estate investors often fall prey to the lure of saving money in the short term. Instead of thinking about the big-picture interests of their business, they cut corners to save on filing fees, administrative costs, attorneys’ fees, and more.
One of the strongest temptations is to download contracts from the internet or, even worse, to write them yourself. Is writing your own contracts a good idea?
Well, I can tell you this: many of our clients at Anderson Business Advisors went this route and are now trying to dig themselves out from the consequences.
Learn From ‘Dan’s’ Mistakes
One of these clients is a man I’ll call Dan. I share his story in my book, Next Level Real Estate Asset Protection, but I’d like to retell it here as an example of why writing your own contracts may not be the best idea since the tethered gas cap.
Dan wanted to enter a lease option with a tenant of his. A lease option is an arrangement that allows a tenant to lease your property and buy it later if they choose. The tenant typically pays an upfront option payment to secure the rights to buy the property. If they fail to buy the property at the end of the option period, the owner retains the option payment.
When it comes to lease options, great care must be taken in writing the option agreement. You need to know the local rules because if you get it wrong, you can be in trouble. I always advise people not to use standard forms they find online. I advise them to work with a good local attorney, even if it’s not my firm.
Well… Dan decided to write his own agreement and serve as his own attorney.
He entered a lease option with this tenant for a property that featured a house and a large outbuilding that could be used as a workshop. The agreement specified that at the expiration of the lease, the tenant could buy the property at “fair market value.”
Who Pays for Careless Neglect?
Fast forward two years. The lease option period ended, and the tenant said, “I want to exercise my option. I want to buy the property.”
Dan said, “Awesome. That’ll be a million bucks, please.”
The tenant said, “You know what, Danno? That doesn’t seem quite right. Why don’t we appraise it and find out its ‘fair market value’?”
They brought in an appraiser, who revealed some big surprises to Dan. It turned out the tenant had been running an unlicensed auto repair shop on the property and, among other damages, had contaminated the ground by pouring oil and antifreeze into it.
The appraiser determined the property’s fair market value, in its contaminated condition, to be only $500,000—because of all the cleanup and EPA work that now needed.
Of course, Dan didn’t want to sell his property at this price because he was convinced it was worth a million and because the tenant himself had done the damage that was lowering its immediate value. However, the problem was that his self-written option agreement stated only that the tenant could buy the property at its fair market value. There was no language about the tenant committing waste to the property.
Unsuccessful Lawsuit
Dan sued the tenant to block him from purchasing it. The two men went to court, and Dan lost. He was forced to sell the property at half its value and to pay the tenant’s attorney’s fees of $120,000.
Dan ended up netting $380,000 in the deal, a loss of $620,000. All because he failed to put some simple provisions in the agreement that any competent attorney would have included, such as setting the price at “$1 million or the fair market value, the higher thereof” and accounting for tenant damage.
The next time you think about writing your own contracts for a real estate deal, I urge you to think of my friend—and client—Dan.
Source: https://www.forbes.com/sites/forbesbooksauthors/2023/09/25/writing-your-own-contracts-a-cautionary-tale/